Friday, June 14, 2013

When The Pension Crisis Hits Home?

Official job figures on Wednesday showed that nearly one-in-ten “pensioners” were still employed - 615,000 men and 388,000 women.

The total of 1,003,000 is an increase of nearly 100,000 in the past 12 months alone and almost double the levels of a decade ago.

Experts said the marked rise was partly down to changing demographics and the fact that many over 65s - the post war baby boomers - wanted to stay on in the office.

But others said tens of thousands of older workers simply had no choice but to carry on trying to top up their savings given the holes in their pension plans. Annuity rates have tumbled since the Bank of England started its money-printing programme in 2009.

Figures published two months ago showed that men need 29pc more savings to reap the retirement income that they could have gained in 2009. A survey this week said a third of retirees would have worked for longer if they had their chance again.

Chris Ball, chief executive of The Age and Employment Network, said: “The attraction of remaining in active employment is a positive thing that influences people. And more of them now see retirement as a gradual process, not simply a cliff edge that they jump off at a particular point in their lives.

“The other side of the coin is that people are being pushed to work longer in many cases because of their economic circumstances. Quantitative Easing has made a big impact on what people can expect from their annuity when they cash it in.”

Ros Altmann, a former Government policy adviser, added: “Part of this is pure demographics. There are more over 65s than ever before. But for many people’s pensions just haven’t worked out in the way they expected.”

High street stores such as B&Q have made a virtue of their older workforce. The DIY chain scrapped its own retirement age in the mid 1990s after staffing an entire store in Macclesfield, Cheshire with over 50 year-olds and watching as profits rose by almost a fifth.

Engineering companies claim they are turning to older workers as universities are no longer producing enough younger recruits for industry.

The increase in working pensioners has helped the prop up the official employment figures.

Wednesday's numbers from the Office for National Statistics showed that employment in the three months to the end of April was a record of 29.7m, up 24,000.

Unemployment over the same period fell 5,000 to 2.51m - fuelling hopes the recovery is gaining some sort of momentum. Public sector employment has fallen to 5.7m - the lowest figure since 2001. Meanwhile private sector employment has leapt by 740,000 in the past year.

Employment minister Mark Hoban said: "Our priority is getting people back into work and today's figures show we have more people in work than ever before, more women in work than ever before, and more hours worked in the economy than ever before."

Saga said the figures showed the value of the "Silver Pound". Over 50 year-olds now account for almost half of all household expenditure in Britain - £459 billion. The age group accounts for 69.6pc of all spend on "health", but also 52.2pc of the spend on alcohol and tobacco and 52pc of all money splashed out on food and non-alcoholic drink.

Clearly demographics explain the rise in older workers but as the article states, quantitative easing in the UK has sent annuity rates tumbling to their lowest level in decades, forcing millions to work longer to shore up their savings.

Disillusionment with pensions has led to a worrying proportion of savers describing the plans they are making for retirement as 'a waste of money'.

Twelve per cent of pension savers over the age of 45 told insurer MetLife that they wish they hadn't bothered saving for retirement, while another six per cent say they are unhappy with the investment returns on their savings.

The past six years of economic turmoil has shaken the confidence of savers and three-quarters of those with pensions are now less than assured in stock markets to deliver their retirement ambitions.

Nearly half of those surveyed said they were pleased to have saved for retirement, but are concerned about the final level of income, while 22 per cent are confident their savings will deliver their desired return.

But while many will have received employer contributions, not to mention tax relief, they would not have otherwise got if they weren't saving into a pension, some still have regrets about choosing a pension as their retirement vehicle.

Dominic Grinstead, MetLife UK managing director, said: 'Long-term equity investment remains the most effective way to provide an income in retirement but it is also clear that the events of the past five years have hit confidence and undermined faith in pension saving.

'The Government has worked hard to make retirement saving pay with plans for a universal state pension, auto-enrolment into company pensions and changes to the rules on taking retirement income which allow greater flexibility.

'However the retirement income industry has to work harder to rebuild confidence and our research shows that guarantees which are affordable have an important role to play in ensuring that people do not end up feeling they have wasted their money.'

Performance of stock market related investments is only half the story. In most cases retirees need to use their pot to buy an annuity to provide a guaranteed return. Annuity rates have dropped significantly during the financial crisis, and though they have improved since the troughs of last summer, a £100,000 pension pot will at best buy you an income of around £5,800-a-year.

Results of a Money Mail investigation will no doubt add to the frustration of pension savers, as it revealed that insurance firms can pocket as much as £29,000 profit from a £100,000 annuitised pension pot.

Such is the concern among some savers about their pension investment prospects, that almost half of those responding to MetLife said they would consider paying for guarantees on their funds, which would see them protecting their capital in return for giving up some of their gains.

But while incomes may not be as high as they expected, pension holders might be glad for every penny saved come retirement, particularly in light of paying for long-term care.

Matt Phillips from pension investment adviser Broadstone told This is Money this week that a lack of pension saving is the 'biggest threat' to British quality of life and urged people to save early and save quickly for their retirement so they don't become a financial burden on their family in the event they go into care.

The Government has capped lifetime care costs for individuals at £72,000, but many still believe they will be forced to sell their homes to fund care, as their retirement income is insufficient to cover it.

The lack of pension savings is a problem all over the world, not just in the UK. It's particularly hard in Europe where demographic pressures and an ageing population, combined with the poor economic environment and structural unemployment in some EU member states, could render public pension systems unsustainable.

In Canada, things are better but we still need to address our looming retirement crisis. I recently wrote about the benefits of Canada's 'Top Ten' pension funds, explaining why our governance model works and why I'm a proponent of enhancing the Canada Pension Plan. Critics will claim that we cannot afford it but when you weigh the costs and benefits over the long-run, there is no question that enhancing the CPP is the best way to secure the future for today’s young workers. It's time our federal and provincial finance ministers seize the day on the CPP.

Below, Fox Business reporter Elizabeth MacDonald discusses how growing number of key California cities are a lot worse off than previously thought, thanks to new changes coming in the way state and local governments must account for their pension costs.

The pension changes from Moody’s, and separately the Governmental Accounting Standards Board, scheduled for this month, will impact a number of California cities who might be joining fiscally troubled Stockton and San Bernardino, among others, as severe credit risks.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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